A calculation for restating semi-annual, quarterly, or monthly discount-bond or note yields into an annual yield. For a fixed income security with a par value of $1000, the calculation is as follows: |||The BEY allows fixed-income securities whose payments are not annual to be compared with securities with annual yields. The BEY is the yield that is quoted in newspapers. Alternatively, if the semi-annual or quarterly yield to maturity of a bond is known, the APR calculation may be used.
A metric used to evaluate the relationship between bond yields and earnings yields in the stock market. The Bond Equity Earnings Yield Ratio (BEER) has two parts – the top is represented by a benchmark bond yield (such as five- or 10-year Treasuries) while the bottom is the current earnings yield of a stock benchmark (such as the S&P 500). |||A BEER of 1 would indicate equal levels of perceived risk in the bond market and the stock market. Analysts often feel that BEER ratios greater than 1 imply that equity markets are undervalued, while numbers less than 1 mean they are overvalued, or that prevailing bond yields are not adequately pricing risk. Consider the example of a BEER made up of a 10-year Treasury with a current yield of 4.5% and an S&P 500 earnings yield of 5% (P/E of 20). The ratio created would resemble the following:Bond Yield (4.5) / Earnings Yield (5) = 0.9 The earnings yield of the stock market (or simply an individual stock) is just the inverse of the P/E ratio.
The amount by which the market price of a bond is lower than its principal amount due at maturity. This amount, called its par value, is often $1,000. As bond prices are quoted as a percent of face value, a price of 98.00 means that the bond is selling for 98% of its face value of $1,000.00 and the bond discount is 2%. |||Bonds trade at a discount to par value for a number of reasons. Bonds on the secondary market with fixed coupons will trade at discounts when market interest rates rise. While the investor receives the same coupon, the bond is discounted to match prevailing market yields. Discounts also occur when bond supply exceeds demand, when the bond's credit rating is lowered, or when the perceived risk of default increases. Conversely, falling interest rates or an improved credit rating may cause a bond to trade at a premium.
A type of swap arrangement in which two parties agree to exchange interest rates on debt obligations, where the floating rate is based on the bond market association's swap index. One of the parties involved will swap a fixed interest rate for a floating rate, while the other party will swap a floating rate for a fixed rate. |||The benefits to two parties entering into a interest rate swap arrangement can be significant. Often, each of the two firms involved has a comparative advantage in its fixed or variable interest rate. Consequently, for budgeting or forecasting reasons, a company may wish to enter into a loan with a fixed or variable interest rate in which it does not have a comparative advantage.
A strategy for managing fixed-income investments by which the investor builds a ladder by dividing his or her investment dollars evenly among bonds or CDs that mature at regular intervals such as every six months, once a year or every two years. Watch: Understanding Bonds |||The advantages of bond ladders include consistent returns, low risk and ongoing liquidity thanks to the consistency of the expiring securities. The bond ladder also protects the investor's bond portfolio from call risk: since maturies are staggered, there is little chance that all the bonds in one portfolio will be called at once.
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.. Watch: Understanding Bonds |||The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries". Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.
The owner of a government or corporate bond. Being a bondholder is often considered safer than being a shareholder because if a company liquidates, it must pay its bondholders before it pays its shareholders. Being a bondholder entitles one to receive regular interest payments, if the bond pays interest (usually semiannually or annually), as well as a return of principal when the bond matures. Watch: Understanding Bonds |||Bonds are generally perceived as being low risk, but the level of risk is dependent upon the type of bond in question. For example, holding corporate bonds will yield higher returns than holding government bonds, but they come with greater risk. Bonds are also subject to interest rate risk, reinvestment risk, inflation risk, credit/default risk, liquidity risk and rating downgrades. An advantage of being a bondholder is that some bonds are exempt from federal, state or local income taxes.
The practice of selling a bond just before it pays a coupon payment and then buying it back once the coupon has been paid. Bond washing results in a tax-free capital gains because after the coupon has been paid, the bond will sell for less. |||Bond washing is a method of tax avoidance. In this manner the bond holder avoids paying taxes on the bond coupon income. Because bond washing is a form of tax evasion, whereby buyers and sellers may collude to benefit from tax avoidance, it has been banned, though the practice still exists.
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